Eric Balchunas, the senior ETF analyst at Bloomberg, just published a very interesting article on how the Tectium ETF approval put some pressure on the SEC.
Here you can find the whole article, slightly edited to remove some links to Bloomberg proprietary functionalities.
Sec Case against Spot Bitcoin ETFs Weakened by Teucrium Approval
The SEC appears to have undermined its argument against spot Bitcoin ETFs by approving Teucrium's futures fund for the cryptocurrency, while strengthening a potential Grayscale lawsuit. The new ETF deviated from the path previously required by SEC Chairman Gary Gensler, instead navigating the same process as spot Bitcoin peers. (04/22/22)
1. Investor-Protections Argument Skirted by TeucriumContributing Analysts Eric Balchunas
Statement
"Subsequently, we’ve started to see filings under the Investment Company Act with regard to exchange-traded funds (ETFs) seeking to invest in CME-traded bitcoin futures. When combined with the other federal securities laws, the ’40 Act provides significant investor protections for mutual funds and ETFs. I look forward to staff’s review of such filings."
Gary Gensler - SEC Chairman, Securities & Exchange Commission
SEC.Gov, Sept. 29, 2021
Click to view entire statement<
">http://ds.prod.bloomberg.com/%7B%20%3CGO%3E%7D>The approval of Teucrium's fund, which was filed under the 1933 Securities Act, appears to us to have undermined the SEC's argument against spot Bitcoin ETFs. The U.S. Bitcoin futures ETFs approved in October were submitted under the Investment Company Act of 1940. SEC Chairman Gary Gensler said on Aug. 3 that he expected Bitcoin ETFs to be filed under the 1940 Act, citing its superior investor protections. "Given these important protections, I look forward to the staff's review of such filings, particularly if those are limited to these CME-traded Bitcoin futures," Gensler said. He reiterated his stance on Sept. 29.
By approving Teucrium's ETF, we believe the SEC can no longer lean on the 1940 Act's investor protections as a reason to deny spot Bitcoin ETFs. (04/22/22)
2. Teucrium & Hashdex Partnership Benefits Both Teucrium Partnered With Hashdex; Ticker Source: Bloomberg IntelligenceTeucrium's partnership with Hashdex may help differentiate the new ETF in an increasingly crowded market. The Hashdex Bitcoin Futures ETF (DEFI), renamed from the Teucrium Bitcoin Futures Fund, could benefit from its association with Hashdex's crypto-focused brand while giving the Brazil-based issuer entry into the U.S. ETF ecosystem. Hashdex already has five digital-asset or crypto ETFs with almost $500 million combined.
The new ETF will track a benchmark based on Bitcoin front- and second-month futures contracts, according to Teucrium's updated SEC filing. (04/22/22)
3. Approval Likely for Another Valkyrie Bitcoin ETFValkyrie also has a Bitcoin Futures ETF filed under the 19b-4 process that's due for an SEC decision by May 7. The Valkryrie XBTO Bitcoin Futures Fund will almost certainly be approved in the wake of Teucrium's approval, but Valkyrie already has an active Bitcoin futures ETF (BTF) with $43 million in assets. Valkyrie could partner with another issuer or crypto company for the new ETF or try to differentiate it from BTF, perhaps through exposure beyond front-month futures, increased leverage or an ESG tilt. (04/22/22)
Recent 19b-4 Applications; Valkyrie is Next
Source: Bloomberg Intelligence
4. Grayscale Argument Strengthened by Teucrium OK Company Filing"The (SEC) has no basis for the position that investing in the derivatives market for an asset is acceptable for investors while investing in the asset itself is not. ...The only logical explanation for the curious inconsistency afforded these competing products is a bureaucratic artifact. ...The standard for approving the listing of spot Bitcoin ETPs is arbitrary and, in practice, impossible to meet. ...The Rule 19b-4 framework is so ill-defined and unachievable as to be arbitrary. ...The Exchange Act and the APA require the Commission to treat BTC similarly to Bitcoin futures ETPs."
Law Firm, Davis Polk & Wardwell LLP
SEC.Gov, Nov. 29, 2021
The SEC's approval of Bitcoin futures ETFs under the 19b-4 process may bolster Grayscale's argument that a denial of its request to convert the Grayscale Bitcoin Trust (GBTC) to an ETF would violate the Administrative Procedure Act. As part of its own 19b-4 filing, Grayscale and its lawyers at Davis Polk say the SEC's stance -- favoring investment in Bitcoin futures rather than the underlying asset -- violates the APA, which requires federal agencies to treat similar situations alike, absent a rational basis for differing assessments.
We agree with Grayscale that the SEC's position appears inconsistent. Yet the agency is unlikely to consider that argument when deciding on the GBTC filing in July. (04/22/22)
5. CME Price an Aggregate of Spot ExchangesCME Bitcoin Reference Rate Constituent List
Source: CFBenchmarks
The SEC's distinction between Bitcoin's spot and futures pricing appears arbitrary to us. The Bitcoin Reference Rate used to determine the value of CME Bitcoin futures is a calculation based on prices from five spot exchanges for the cryptocurrency -- the very venues and markets the SEC deems prone to fraud and market manipulation. The proposed spot Bitcoin ETFs would be tied to similar aggregated valuation methodologies from diverse exchanges to prevent erroneous data or manipulation from affecting pricing assessments. (04/22/22)
6. Regulation or Surveillance Agreements NeededGovernment Filing
"As explained above, for bitcoin-based ETPs, the Commission has consistently required that the listing exchange have a comprehensive surveillance-sharing agreement with a regulated market of significant size related to bitcoin, or demonstrate that other means to prevent fraudulent and manipulative acts and practices are sufficient to justify dispensing with the requisite surveillance-sharing agreement. The listing exchange has not met that requirement here. "
SEC - Division of Trading and Markets
SEC.Gov, Nov. 12, 2021
Quote located on page 46, click to view entire filing
No spot Bitcoin ETF is likely to be approved by the SEC without new rules, regulation of crypto exchanges or surveillance agreements with those exchanges. The term "Surveillance-Sharing Agreement" appears at least 40 times in SEC 19b-4 letters denying Spot Bitcoin ETF applications. Agreements with a handful of the largest crypto exchanges might satisfy the SEC, but setting them up would be a daunting task. It's more likely that a market of significant size will have to come under a regulatory framework with the SEC or CFTC. A filer also might gain approval if it can convince the SEC that the CME futures market is "of significant size."
The 19b-4 rule-change process is part of the Securities Exchange Act of 1934, which included anti-fraud provisions aimed at preventing market manipulation. (04/22/22)
7. CME Futures Market Falls Short for SECGovernment Filing
"The Commission accordingly concludes that the information provided in the record does not establish a reasonable likelihood that a would-be manipulator of the proposed ETP would have to trade on the CME bitcoin futures market to successfully manipulate the proposed ETP. Therefore, the information in the record also does not establish that the CME bitcoin futures market is a `market of significant size' with respect to the proposed ETP."
SEC - Division of Trading and Markets
SEC.Gov, Nov. 12, 2021
Quote located on page 35, click to view entire filing
Cboe, NYSE and issuers have argued in multiple spot Bitcoin ETF applications that the CME Bitcoin futures market is meaningfully large and regulated by the CFTC, satisfying the SEC's surveillance criteria. The SEC has repeatedly rejected this notion, saying actors could manipulate the spot Bitcoin market without trading CME futures or affecting them. Yet the two markets are intertwined: Manipulating spot prices would affect futures.
We believe the recent approval of Teucrium's Bitcoin futures ETF, a 1933 Act fund that went through the same 19b-4 process as spot Bitcoin ETFs, further weakens the SEC's argument. (04/22/22)
8. SEC Remains Unmoved by Inferior Bitcoin OptionsGovernment Filing
"The Commission disagrees with the premise of the Exchange’s argument. The proposed rule change does not relate to a product regulated under the 1940 Act, nor does it relate to the same underlying holdings as the Bitcoin Futures ETFs. The Commission considers the proposed rule change on its own merits and under the standards applicable to it."
SEC - Division of Trading and Markets
SEC.Gov, Nov. 12, 2021
Quote located on page 50, click to view entire filing
The SEC's stated focus is on protecting investors, but its rejection of spot Bitcoin ETFs is limiting access and leaving the market with inferior options -- futures ETFs, whose roll costs can exceed 10% a year, or the Grayscale Bitcoin Trust (GBTC), which has the potential for large premiums and discounts. Grayscale cites the latter as a reason to permit GBTC to convert into an ETF. Issuers have frequently noted the "inconsistency" of the SEC's approach in filings: It's allowing a derivative of an asset to be in an ETF wrapper but not the asset itself.
The SEC has repeatedly dismissed these objections, saying 19b-4 review is a stand-alone process. (04/22/22)
Spot Bitcoin ETF in U.S. Could Double Crypto-Fund Assets by 2028
Flows into cryptocurrency funds will likely accelerate if a U.S.-listed spot Bitcoin ETF is approved by the end of 2023, as we expect. With greater regulatory clarity from the SEC, the sector's global assets could more than double to $120 billion within five years as crypto funds tap into the $26 trillion controlled by U.S. advisers. (03/30/22)
9. Crypto Funds Could Tap Billions From AdvisersGlobal Crypto Fund Assets to Double by 2028
Source: Bloomberg Intelligence
Exhibit<
">http://ds.prod.bloomberg.com/%7BAVAT%20385701823%3CGO%3E%7D>U.S. advisers could add tens of billions of dollars to publicly listed crypto-fund assets in the first few years after a spot Bitcoin ETF is approved by the SEC. Only a small minority of advisers have exposure to crypto, and most of them allocate 1% or less. U.S. advisers control about $26 trillion, Cerulli Associates estimates. If advisers overseeing about half of that money shift just 0.1% to digital assets, that would total $13 billion.
Global crypto-fund assets could top $120 billion within five years of U.S. spot ETF approval, we believe, even without massive price gains. (03/30/22)
10. Regulatory Risk, Uncertainty Reasons for HoldupRegulatory concern is the No. 1 reason advisers haven't invested in crypto assets, according to a 2022 survey by Bitwise -- an objection that could be addressed by SEC approval of a Bitcoin ETF. So far, the SEC has regulated the crypto industry through enforcement. Regulatory clarity should improve in the next few years due to President Joe Biden's executive order and pending SEC rule expansions, helping to fuel the growth of crypto funds.
Advisers want access to crypto within the traditional finance rails, the survey showed. The fourth most common reason for not investing in crypto was the lack of easily accessible investment vehicles, such as ETFs or mutual funds. The top choice for investing in Bitcoin was a spot Bitcoin ETF, with direct ownership of coins a distant second. (03/30/22)
Adviser Survey Results on Crypto Asset Investing
Source: Bitwise Asset Management
11. International Crypto Funds Drive GrowthGlobal Public Crypto Funds Expand Beyond 100
Source: Bloomberg Intelligence
The number of publicly listed cryptocurrency funds -- mostly tracking Bitcoin and Ethereum -- should sustain the rapid growth of the past two years through 2022 and into 2023 as more countries allow the launch of spot products and regulators get more comfortable with digital assets. We estimate at least 107 crypto funds with 119 share classes are listed on public exchanges globally, including ETFs, CEFs, mutual funds and trusts such as Grayscale's. The pickup in launches shows that issuers see potential for growth in assets and revenue.
With no spot option in the U.S., investors seeking crypto exposure are left with futures ETFs that incur roll costs and trusts that trade away from their underlying values. (03/30/22)
12. Thematic ETFs Provide Alternate RouteThematic Equity Blockchain & Crypto ETF Assets
Source: Bloomberg Intelligence
Fifteen blockchain- or crypto-themed equity ETFs trade on U.S. exchanges, up from four in March 2021, while sector assets have leveled off at $1.9 billion. We expect the number of funds to increase slightly alongside assets in 2022, with Schwab the next issuer to launch as the SEC withholds approval of spot Bitcoin ETFs. The themed ETFs offer SEC-approved exposure to crypto markets to investors who prefer to avoid futures. They also provide diversification and alleviate perceived regulatory risks associated with direct crypto investment.
The Amplify Transformational Data Sharing ETF (BLOK) is by far the largest of the group at more than $1 billion in assets. (03/30/22)
13. U.S. Dominates Crypto Fund Assets Without Spot ETFPublic Crypto Fund Assets by Country of Listing
Source: Bloomberg Intelligence
The U.S. has a 75% market share by value for publicly listed crypto funds, primarily due to the Grayscale Bitcoin Trust (GBTC). That's despite the lack of an SEC-approved spot Bitcoin ETF, which would likely take in billions of dollars within days of launching. Global assets sit at about $61 billion, down from a peak of almost $80 billion in November. We expect sector assets to rise absent a price collapse, given inflows have remained somewhat steady, even amid poor performance.
Approval of a spot Bitcoin ETF, though unlikely in 2022, would be a significant catalyst for the sector's asset growth. (03/30/22)
14. Bitcoin and Ethereum Funds Are 93% of Crypto Fund AssetsContributing Analysts Eric Balchunas
(03/30/22)
Publicly Listed Crypto Funds by Asset Exposure
Source: Bloomberg Intelligence
This is a very interesting article, giving the reader a deep technical understanding, both from a legal, and a practically viewpoint, on how the SEC has eventually to approve.
For the less technical readers, here a meme explaining the same concept with a single image:
